Economist offers views on run-up to new farm bill

Field tours weren’t all that was on offer at the Rice Research and Extension Center field day in Stuttgart, Ark. There were also talks on the economics of growing rice and the current economic health of Mid-South producers.

It was during this session that Eric Wailes, an economist and professor at the University of Arkansas, laid out what could be expected during the coming 2007 farm bill debate. For row-crop producers, there was scant good news.

Wailes said there are three main drivers behind 2007 Farm Bill policy:

• The federal budget deficit.

• The WTO Doha round. “Is it still breathing and on its last legs?”

• Economic conditions — “especially in light of high fuel prices and weather.”

The Bush administration is projecting the federal budget is headed for surpluses. Wailes waylaid that expectation.

“The simple story…coming from the House Agriculture Committee, is the official numbers have omitted many things that (are deficit-inducing). That’s particularly true if Congress’ tax cuts and the supplemental funding for the Iraq and Afghanistan wars, and additional interest on the debt, are added in. (If those are included), that means a serious, $400 billion deficit. That means less money available to fund U.S. rice and agriculture commodity policy.”

Upon hearing this, an interpreter — needed for a large group of his Costa Rican countrymen attending the field day — turned to Wailes and repeated incredulously, “That’s $400 billion?”

“Si,” replied Wailes with a shrug.

During the 2002 farm bill debate, the United States had between $200 billion and $300 billion in surplus. As a result, Congress wrote a very favorable farm bill. That won’t be the case for the 2007 version, warned Wailes.

“As for the Doha round, there’s a big question anything will come out. There is some hope that in September a meeting in Australia involving the Cairns free-trade group will (produce ideas). Another meeting in Brazil involving the G-20 group (an organization comprised of developing countries including Brazil and India) will occur. So there’s a slight chance for some movement.”

If nothing comes from those September meetings, “I don’t think there’s any further opportunity. (If that happens) there may be no more negotiations until 2011 or 2012 when the United States has a new administration.”

Further, without a trade agreement, there is a great likelihood a number of disputes will be filed against U.S. commodity policy. Rice will likely face a case brought by the Uruguayans.

Wailes and colleagues are part of a consortium of universities doing research for Congress. Some of this research involves analysis of the U.S. proposal for the trade negotiations.

What they’ve found shows that “market expansion would be possible under the current U.S. proposal. That’s because it requires a reduction in tariffs and expansion in tariff rate quotas (TRQs). That would open up trade restrictions, particularly in countries like Japan and Korea.”

Even with a new agreement based on the U.S. proposal, compared to baseline estimates “we’ll see an expansion in trade of about 10 to 12 percent. There will be higher export prices of about 8 percent. U.S. exports would initially decline as a result of reductions in domestic support and price programs. But they would then begin to expand when foreign markets open up.”

The United States hasn’t filed the sole trade proposal. The EU has filed one, as has the G-20 and the G-10, a group of protectionist developed countries.

However, outside the U.S. proposal there will be no expansion in rice trade.

Farm bill extension?

Many row crop farmers want an extension of the 2002 farm bill. Wailes says that will be “very tough” to accomplish.

“The Bush administration is weighing in on this, although the farm bill will be written by Congress. Bush wants an equitable plan, meaning payments spread out over more crops — particularly fruits and vegetables. They also want something very predictable that doesn’t go up and down in payments. And they also want something crafted to be beyond challenge from WTO trade dispute mechanisms.

“I think the federal deficit and current farm economic conditions are the main drivers in what kind of legislation we get. There are already differences between farmers on how best to proceed. That isn’t a good sign.”

Something else to keep an eye out for: a nationwide producer policy preference survey has just been completed. A report on it will be released in September.

“There’s general agreement among farmers that the next farm bill needs a mechanism regarding bio-energy policy and production incentives. This is primarily to reach a goal of reducing dependency on non-renewable energy sources.”

But there are clear differences in how producers want the farm bill structured. Crop producers want the same payment mechanism as in the 2002 farm bill. Livestock producers want a shift in funding to disaster payments, credit and risk management activities.

The final thing that will definitely be discussed is payment limits.

There have already been attempts to negotiate reduction in payment limits. There will be three main components on the front burner:

• The triple entity rule.

• The use of certificates.

• Actual payment limits.

These things will reduce the amount of money available to any single farm.

The Arkansas congressional delegation is suggesting a one-year extension of the 2002 farm bill to see if a Doha agreement can be crafted. If there is no agreement, “they still want the same farm bill framework. But there will definitely be accommodations due to the Brazilian cotton case we lost under WTO. And fruit and vegetable producers will get payments.

“The FAPRI analysis shows there’s a 42 percent chance, because of price variability, that commodity payments will exceed what’s legal under the WTO agreement under an extension of the 2002 farm bill.”

One of the options getting traction in the Midwest is revenue insurance. It’s attractive to that region “because it’s not product specific. It’s a whole-farm risk management mechanism that’s more in compliance with WTO.”

The coda for Wailes’ presentation was especially sobering. Last year, deep-well rice cost Arkansas growers $90 per acre more than what cooperative Extension budgets had projected. Further, across all crops in the state, “we estimated there was nearly a $1 billion loss in net farm income due to drought, hurricanes and higher energy cost. In 2006, drought and high energy costs are again placing a large financial strain on Arkansas farmers.”